Lesson 3 of 5 · 13 min
Agency and non-agency RMBS, and pass-throughs
A mortgage pass-through hands investors the pool's monthly interest, scheduled principal and prepayments, minus fees, so its coupon sits below the pool's average mortgage rate and its cash flows inherit all the pool's prepayment risk.
In short
- RMBS are bonds backed by residential mortgages. In the US they fall into three sectors: guaranteed by a federal agency, guaranteed by a GSE, or issued by private entities with no such guarantee.
- The first two are agency RMBS; the third is non-agency RMBS, which relies on credit enhancement (pool insurance, letters of credit, guarantees, subordination).
- A mortgage pass-through passes the pool's monthly interest, principal and prepayments to investors, less servicing and guarantee fees.
- Pass-through rate (net coupon) = pool's mortgage rate − fees, so it is below the WAC.
- WAC and WAM weight each mortgage's rate and remaining months by its share of the pool's current balance.
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